Recommendation on Accounting Separation and Cost …



PUBLIC CONSULTATION ON A DRAFT ERG OPINION ON PROPOSED CHANGES TO COMMISSION RECOMMENDATION OF 1998 ON ACCOUNTING SEPARATION AND COST ACCOUNTING

JOINT COMMENTS OF RETEVISION AND TRADIA

RETEVISIÓN and TRADIA, Spanish broadcasting transmission operators belonging to the ABERTIS Group, welcome the opportunity given by the ERG to comment on the draft ERG Opinion on proposed changes to the Commission Recommendation on cost accounting and accounting separation, and its Annex. They are pleased to submit the following comments, which focus on sections 2, 3, 4, 7 and 8 of the Annex.

With regard to section 2.5

The statement that inclusion of individual items to capital employed should have an impact on WACC contradicts to a certain extent the discussion on WACC. In particular when it is argued that defining separate WACCs for regulated and unregulated businesses might be difficult. The underlying principle that should be maintained is that the sum of a theoretical WACC by activity has to be equal to the WACC of the Notified Operator as whole.

It is important to note the impact that regulation might have on the WACC of a company as it tends to increase the level of risk in general terms.

With regard to section 3

As stated later on in the Draft, the reconciliation of a bottom-up analysis with the results of an incumbent operator depend greatly on the philosophy used, i.e. Scorched Node vs. Scorched Earth approaches. Although obvious, as a general rule, it should be stated that differences of more than 15% between the two should be avoided for transparency’s sake.

With regard to section 3.1

It is important to note that the philosophy being described requires that all assets necessary to replicate the service (that are material) be considered. In this way, notified operators need to identify assets that are currently providing service, but are fully amortized from a financial point of view. Current application of the re-valuing rules indicates otherwise. Furthermore, depending on the service being costed, the incentive might be misdirected towards re-investing rather than giving value to an element that stills functions and provides a service within the network at a lower cost.

With regard to Section 4.

Given the size of the Member states and the limited number of operators, it seems obvious that benchmarking against national indexes is at best of limited value. Furthermore, little is said about the importance of using long historical series for the calculation of all the parameters involved in the calculation of WACC. This implies that the volatility of such numbers should be small or non existent. However, since these can be easily adjusted by the use of different series or benchmarks, they become the primary lever for price adjustment.

The other advantage of using a larger market as a reference has to do with a better adjustment to the Efficient Market Hypothesis that is behind CAPM and WACC.

Finally, although national operators are in large publicly traded, there are a number of companies that might have SMP status which are not. This will introduce another element of subjectivity to the determination of WACC parameters and should be addressed in the general guidelines being drafted.

With regard to Section 7. Reporting requirements and verification.

It should be noted that the proposed structure of financial statements and supporting notes carries significant effort both in human and economic resources on the part of the entity subject to regulation. Therefore, the Draft should include a proposed phase-in period as well as the need for including in this section the opinion and capabilities of the auditing firms which will be responsible for carrying out these tasks.

Furthermore, the degree to which these works will impact the civil responsibilities of such firms needs to be clearly established as it has a direct impact on the depth and value, both to the NRA and the operators with SMP.

With regard to Section 7.3

In spite of the obvious benefit to competition that extensive disclosure would have, it should be noted that national differences in disclosure requirements can have a profound and discriminatory effect on cross border competition. In this way, protectionist states within the Union, might require a more narrow disclosure policy resulting in an unequal ability to analyze and evaluate, for example, entry in such market.

With regard to Section 8.

Ramsey pricing can provide an adequate response to industries that are undergoing a significant technological change which represents a dramatic change in the profit structure. This may be the case for Broadcasting operators undertaking investments in Digitalization in view of the analogue switch off.

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